Markets and Trust

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Liran Einav, Chiara Farronato, and Jonathan Levin write,

Businesses that hope to create successful marketplaces or platforms for matching buyers and sellers have to solve several problems. They need to help buyers and sellers Önd each other, either by developing a centralized assignment mechanism or by allowing for e§ective search. They need to set prices that balance demand and supply, or alternatively ensure that prices are set competitively in a decentralized fashion. And importantly, they have to maintain an adequate level of trust in the market, by developing mechanisms to guard against low quality, misbehavior and outright fraud.

In The Book of Arnold, I write,

In the 21st century, many of us shop on the Internet. How do I know that the biking gloves I order really have the padding that I want? How do I know that the retailer will send me the gloves that I order? How do I know that the gloves will not be stolen before they reach me?

When you consider these sorts of questions, you realize that our modern market economy is built on layers of trust. In order for trade to take place, individual beliefs, cultural norms, and formal institutions must be aligned to reinforce such trust.

The catch is that almost every mechanism for promoting trust has flaws and can be abused.

9 thoughts on “Markets and Trust”

  1. I think it a brilliant move to incorporate “trust” into one’s vision of economics and the economy. It might turn out the gateway to a much needed theory of the mixed economy, with adequate consideration of social institutions, thus widening the economist’s perspective to appreciate the intimate interactions between economic and political processes.

    If a systematic concern for freedom is to have a place at the core of our social attention (expressed in political or scientific terms), rather than the defence of the dogmatic claims of various libertarianisms (and the pleasure of feeling to be right, rather than the tension of moving into an open frontier), the recognition that collective decisions and habits represent indispensable preconditions of a free society is the bridge to be crossed.

    An economy (or indeed “markets”) cannot work without trust, and trust building is a process that always involves significant political and governmental dimensions, whose denial, diminution or wholesale disparagement turns libertarianism into a cranky ideology that tries to make us forget that freedom is an open process encompassing the views and actions of all citizens rather than being an incontrovertible mathematical deduction.

    For more see: http://redstateeclectic.typepad.com/redstate_commentary/2014/10/trust-and-democracy.html

    • Here is why I,have a big problem with this. When the NSA story was breaking every government official had an opportunity to tell the truth to the votere on something they knew the truth was going to come out on. They all lied all the way up to the very top. The only defense is that one cannot extrapolate from this to everything else. But I do.

  2. Amazon may have solved many of these trust question. The buyer can return anything, for any reason postage paid, mailing label provided. Box it up in the original package, take it to the post office, they scan the label and you are done.

  3. Wasn’t the original business plan for Amazon to use very aggressive price discrimination?

    A bit ironic that it has built so much trust that I now basically go there whenever I want to buy something.

  4. Driving behavior and resulting traffic patterns, fatality rates, traffic law enforcement might be an interesting example of an emergent pattern that we can all immediately relate to which illustrates the nexus of personal belief, habits of behavior, “trust”, social institutions, interaction between private and government actions, etc. More visible than the largely unseen of economic patterns.

    • Thanks for giving us an interesting example.

      Funny, how people come from different perspectives to look at the same issue.

      I am inclined to think that the trust building provided by government, the state, the political system is generally harder to identify in their full ramifications, than the endeavours of an enterprise to build trust with its clients.

      Maybe this would be an interesting exercise:

      let us list all the efforts and institutions supported by government that need to be in place before an enterprise can actually put in place its specific trust-building strategy.

    • I scour the reviews on Amazon. I have started whenever I am going to buy multiple copies of something, the latest example somewhat ironically being security cameras, I will buy one to verify the accuracy of the reviews before adding more. Sometimes “trust” is really “distrust in action.”

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